Credit upgrades may become increasingly difficult for U.S. banks to attain, a Standard & Poor's Corp. official said on Monday.
The comment came as banks received their latest glowing report card from the rating agency - 13 U.S. banks were upgraded and only four were downgraded in the first half
But as bank ratings coalesce in the "low A" and "high BBB" area, the pace of upgrades may slow, said Robert Swanton, banking analyst at Standard & Poor's.
Bank capital levels are already so high that adding new capital will not be enough to justify upgrades in many cases, he said.
Eye on Fees
Instead, Standard & Poor's will be looking at a bank's ability to generate earning assets or fee income.
"Standard & Poor's believes the worst of the problems are over," he said. "But the banking franchise is being diminished and banks are under attack in some business lines, and we are looking for evidence that banks are improving their franchises."
Allerton Smith, bank debt analyst at First Boston Corp., said a ceiling on bank ratings is developing, with only the proven performers getting "high A" ratings.
He added that the double-A area is near unattainable for most U.S. banks, adding that Republic New York Corp. was the only bank holding company to be upgraded to the AA level in recent years.
The high level of bank upgrades was part of an overall improvement in credit quality in corporate America. Standard & Poor's said upgrades for all companies exceeded downgrades in the second quarter for the first time since the first quarter of 1989.
A bank analyst at Moody's Investors Service Inc. said its tally will not be ready until after the quarter ends. In the first quarter, it raised the ratings on 14 U.S. banks and downgraded none.
Mr. Swanton said banks continued to benefit from wide net interest margins, high liquidity, and reductions in nonperforming assets.
Banks rebounding from real estate woes were major beneficiaries of upgrades in the second quarter.
Shawmut National Corp. - nearly brought to its knees by the New England recession a few years ago - was raised to investment-grade status. Senior debt was increased to BBB-minus from BB-plus.
Midlantic Corp. moved up three notches closer to investment-grade - its senior debt was increased to BB from B.
Large diversified banking companies also benefited.
Chase Manhattan Corp. and Fleet Financial Group moved into the low-A area. Senior debt was increased at both companies to A-minus from BBB-plus.
Mr. Smith of First Boston noted that the upgrades have had a significant effect on the prices of the banks' bonds.
He said that while yield spreads to Treasuries of most banks tightened about 5 basis points in the second quarter, the spread on Chase's 10-year notes has narrowed to 91 basis points from 115. Fleet's notes have tightened to 87 basis points from 100.